OAS Deferral Explained: How to Defer Old Age Security and Maximize Retirement Income

OAS deferral is a strategic decision many Canadian retirees face: accept Old Age Security (OAS) payments at the standard age or postpone them in exchange for a larger monthly benefit later. This guide explains what deferral means, how the increase is calculated, tax and clawback considerations, application steps, and real-world examples to help you decide whether deferring OAS fits your retirement plan.

What Is OAS Deferral?

Old Age Security is a government-funded pension available to eligible Canadians, usually starting at age 65. Deferring OAS means postponing the start of your OAS payments after your 65th birthday for a set period to obtain a higher monthly amount when you do begin receiving benefits. The deferral option is intended to give retirees a trade-off between earlier, smaller payments and later, larger payments.

How OAS Deferral Increases Your Payment

The OAS deferral benefit is applied as a percentage increase to your monthly pension for each month you postpone payments. Specifically, deferring OAS increases the payment by 0.6% for each month you delay, which amounts to 7.2% per year. You can defer for up to five years, meaning the maximum increase is 36% if you wait until age 70 to start OAS.

Use the following basic formula to estimate your deferred payment: start with the standard OAS monthly amount at age 65 and multiply it by (1 + 0.006 times number of months deferred). For example, deferring for 24 months increases the payment by 14.4% (0.6% x 24), so your deferred payment equals the standard amount times 1.144.

Who Is Eligible to Defer OAS?

Most Canadian citizens and long-term residents who are eligible for OAS at age 65 can choose to defer. Eligibility to receive OAS itself depends on residency and other criteria, but if you qualify for OAS, you can normally postpone payments up to age 70. There is no requirement to have earned or employment income to defer, but you must apply and inform Service Canada of your decision to start benefits at a later date.

Tax and Clawback Implications

It is important to understand tax and recovery rules before deciding to defer. OAS benefits are taxable income for federal and provincial tax purposes. Deferring raises your monthly OAS payment in later years, which increases taxable income in those years.

Another critical consideration is the OAS recovery tax, often called the OAS clawback. The federal government reduces OAS payments for individuals whose net income exceeds a threshold set annually. Deferring does not exempt you from the clawback; if your income in the year you start receiving OAS exceeds the threshold, your higher deferred payment could be partially or fully recovered. Assess projected income, RRIF withdrawals, and other sources to estimate whether a deferred OAS will be reduced by the clawback.

How to Apply to Defer OAS

Deferring OAS does not always require a separate special form beyond indicating your desired start date when you apply for OAS. You can apply through Service Canada online using My Service Canada Account, by telephone, or in person at a Service Canada Centre. It is recommended to apply several months before you want payments to start. If you already receive OAS and want to stop and defer future payments, contact Service Canada for the correct process and timelines.

Pros and Cons of Deferring OAS

Deferring OAS can be powerful, but it is not universally the best choice. The primary benefit is a guaranteed, inflation-indexed increase in monthly OAS payments, which can be valuable if you expect to live well into your 70s or 80s and want steady, higher baseline income.

On the downside, deferring means you give up payments for the deferral period, which may be problematic if you need income earlier. Lifetime health and mortality, market returns on alternative investments, and the risk of income-based clawback all influence whether deferral is optimal. For those with shorter life expectancy or high immediate income needs, taking OAS earlier may be preferable.

Strategic Considerations

Think of OAS deferral in the broader context of your retirement income plan. Key factors to weigh include life expectancy, pension and annuity income, Registered Retirement Income Fund (RRIF) withdrawal strategies, Registered Retirement Savings Plan (RRSP) balances, and potential taxation. If you can invest the income you would otherwise receive between 65 and 70 and earn a higher after-tax return than the effective increase from deferral, taking OAS earlier and investing it might make sense.

Also consider timing relative to other benefits and taxes. For example, larger OAS payments can push you into higher tax brackets or trigger the OAS recovery tax. Coordinate OAS timing with CPP decisions, employer pensions, and RRIF withdrawal rates to smooth taxable income across retirement years.

Tip: Run a side-by-side cash-flow projection comparing starting OAS at 65 versus deferring to 70, including expected tax, clawback, investment returns, and life expectancy assumptions.

Practical Example

Imagine a hypothetical retiree whose standard OAS payment at 65 is represented as 100 units. Deferring to age 70 (60 months) increases that payment by 36%, so the new monthly payment becomes 136 units. If the retiree expects to live long enough to benefit from that higher ongoing payment and is not likely to face significant clawback, deferral improves lifetime OAS income. If instead the retiree needs cash flow immediately or expects high income in later years that could trigger recovery, taking OAS earlier might be better.

Common Questions

Can I change my mind after I defer OAS?

You can start OAS at any point up to age 70, but once you start receiving payments you generally cannot retroactively change the start date. Contact Service Canada as soon as possible if you change your plans, since processing timelines and rules determine available options.

Does deferring OAS affect other benefits?

Deferring OAS mainly affects the size and timing of OAS payments. It does not change eligibility rules for other government programs, but because OAS is taxable, larger payments may affect income-tested benefits or tax credits.

Is deferral better than investing the OAS payments?

There is no single answer. If you are confident you can invest the OAS payments at a return higher than the guaranteed increase from deferral (after taxes and inflation), taking OAS earlier and investing could be advantageous. However, investing returns are uncertain, while the deferral increase is guaranteed and inflation-indexed.

Next Steps and Practical Advice

Start by estimating your expected retirement cash flow, including CPP, employer pensions, savings, and projected RRIF withdrawals. Model scenarios for OAS starting at 65, 66, 67, up to 70, and include tax and clawback calculations for each scenario. If this analysis feels complex, consult a financial planner who understands Canadian retirement benefits and tax rules.

Finally, record your decision and communicate it to Service Canada and any financial professionals who manage your retirement accounts. Keep an eye on annual OAS thresholds and tax rules that may affect the value of deferral over time.

Conclusion

OAS deferral offers a simple, guaranteed way to increase monthly government retirement income by up to 36% if you wait until age 70. The right choice depends on your health, longevity expectations, income needs, tax situation, potential clawback exposure, and investment alternatives. Carefully model outcomes or seek professional advice to ensure your decision aligns with your broader retirement strategy.